It's rare for PepsiCo to miss Bloomberg Consensus earnings estimates. Still, the soda and snack giant has stumbled amid growing uncertainty surrounding the trade war and waning consumer sentiment—factors that ultimately prompted the company to lower its full-year earnings outlook.
The maker of Pepsi beverages and Frito-Lay snacks missed the consensus estimate, with Barclays analyst Lauren Lieberman calling the miss "exceedingly rare to see PEP results fall short of consensus expectations and while the miss was just 1c, we think it exemplifies just how challenging things are at the company today given in the past decade-plus, there's always been a way to deliver the bottom line."
Here's a snapshot of Pepsi's 1Q25 earnings:
Core EPS: $1.48 (vs. $1.61 YoY), slightly below Bloomberg Consensus expectations of $1.49
Reported EPS: $1.33 (vs. $1.48 YoY), missed the estimate of $1.48
Operating Profit: $2.58B, down 4.9% YoY, missed $2.78B estimate
Revenue: $17.92B, down 1.8% YoY, beat $17.77B estimate
Organic Revenue Growth: +1.2% (vs. +2.7% YoY), above +0.53% estimate
Capex: $603M, below $657M estimate
Convenient Foods Volume: -3%
Regional Breakdown:
Foods North America: $6.21B
Latin America Foods: $1.66B
EMEA: $2.39B
International Beverages: $759M
PepsiCo Beverages North America: $5.88B (vs. $5.87B YoY, beat $5.83B estimate)
"As we look ahead, we expect more volatility and uncertainty, particularly related to global trade developments," CEO Ramon Laguarta stated.
The common theme among US companies has been a reduction in or complete withdrawal of guidance (see AA) due to tariff uncertainty. Pepsi slashed its EPS outlook for the year due to mounting macroeconomic headwinds but maintained its organic revenue growth forecast and shareholder return targets.
Here's more color on the changing outlook:
Core EPS: Now expected to decline 3% YoY (previously expected a low-single-digit increase)
Core EPS (constant currency): Now flat YoY (previously expected mid-single-digit growth)
Organic Revenue: Still expects a low-single-digit increase
Tax Rate: Core annual effective tax rate expected at ~20%
Shareholder Returns: Still targeting ~$8.6 billion in total cash returns for the year
Goldman analysts Bonnie Herzog and Ethan Huntley, along with others, provided clients with their initial summary of the mixed earnings report, indicating a "Q1 topline beat but a slight EPS miss - FY25 EPS guide lowered given tariffs & macro pressures."
Here's more color on their take:
Investor expectations heading into PEP's Q1 print were quite low, dragged largely by ongoing concerns over the health of the consumer which have pressured consumption trends - as seen in recent scanner data trends, particularly for FLNA. And as expected, PEP's Q1 results were soft with +1.2% organic revenue growth (vs our/cons ests of +0.9%/+0.6%), though the planned timing and phasing of certain productivity initiatives weighed on core operating margins - leading to a slight EPS miss at $1.48 (vs our/FactSet cons ests of $1.50/$1.49). Further, given expected higher supply chain costs related to tariffs, elevated macroeconomic volatility, and a subdued consumer backdrop, PEP lowered its FY25 f/x neutral EPS growth to ~flat y/y (vs +MSD growth prior) but maintained its organic sales guidance of +LSD% (vs our/Visible Alpha cons ests of +2.5%/+2.3% ahead of the print). Surprisingly given the weaker dollar, PEP continues to expect a ~3pt headwind from f/x to impact reported net revenue and EPS growth and therefore expects core EPS growth of -~3% implying FY25 EPS of ~$7.92 (vs $8.16 last year, and vs our/FactSet cons est of $8.29/$8.26 into the print). Furthermore, PEP restated its financial segments this morning making it difficult to analyze their new segmented results vs expectations. However, PEP's PBNA segment delivered 1% organic sales (vs our/cons ests of +0.5%/-0.1%) and 14% operating profit growth and PEP's new PepsiCo Foods North America (PFNA, comprised of the former FLNA and QFNA) delivered -2% organic sales and -7% f/x neutral operating profit growth. While optically concerning, we think today's results could serve as a clearing event - helping to reset investor expectations at a much more realistic level. However, we expect the stock to underperform today.
Taking a step back, Q1 organic sales growth was up +1.2% (vs our/cons ests of +0.9%/+0.6%) - despite the benefits of an easier y/y compare (1Q24 organic sales growth of +2.7%, with vols -2%) - driven by healthy price/mix and relative strength internationally. As expected, the top-line growth continued to be driven by net price realization (+3% vs our +1.8% est), reflecting mgmt's continued efforts to offset inflationary cost pressures with strong revenue management actions. That said, organic volumes were under pressure, as expected, down -2% (vs our/cons ests of -0.9%/-1.5%) - and were sequentially weaker than Q4 (-1%).
By segment, PEP's PBNA segment delivered 1% organic sales (vs our/cons ests of +0.5%/-0.1%), with price mix of +2% and volumes down -1%. PFNA organic topline growth was down -2%, with price mix of +1% and volumes down -3%. Internationally, PEP's new International Beverages Franchise (IB Franchise) organic topline growth was up +7%, with healthy +5% volume growth and price mix of +2%. EMEA organic topline growth was up a solid +8%, driven by price mix of +16% with volumes -8%. Elsewhere, Latin America Foods (LatAm Foods) organic topline growth was up +3%, driven by price mix of +3% with volumes down -0.5%. Lastly, Asia Pacific Foods organic topline growth was down -1%, driven by healthy volumes of +3.5%, albeit offset by price mix (-4%). Moving down the line, gross margins were broadly flat y/y at 55.7% (vs our/cons ests of 55.8%/55.5%), while Op margins were down ~50bps y/y to 15.6% (vs our/cons ests of 15.7%/15.8%), as SG&A expenses as a % of sales were up ~60bps y/y to 40.1%. As a result, PEP delivered Q1 core f/x neutral EPS growth that was down -4% to $1.48 (vs our/cons ests of $1.50/$1.49).
Bottom Line - We maintain our Buy rating on PEP as we believe it remains well positioned given its strong brand portfolio (esp. Frito Lay) and long-term growth opportunities in Beverages, particularly given its impressive revenue growth management capabilities, its owned distribution network and superior supply chain, which ensures the right (& affordable) products are available when & where needed. Overall, we continue to believe PEP should be able to deliver sustainable average annual +MSD% organic sales growth in the next decade - despite some potential near-term headwinds.
Here's more commentary from other Wall Street desks (courtesy of Bloomberg):
Barclays (equal-weight), Lauren Lieberman
"It is exceedingly rare to see PEP results fall short of consensus expectations and while the miss was just 1c, we think it exemplifies just how challenging things are at the company today given in the past decade-plus, there's always been a way to deliver the bottom line," Lieberman writes
PEP's reduced annual EPS guidance reflects higher supply chain costs (tariffs); in prepared remarks, PEP also discussed upping commercial investments
PEP mentioned two new areas of focus for cost savings within the new Pepsi Foods North America division: "optimizing and right-sizing" the supply chain and the "go-to-market footprint"; increasing efficiencies in transportation & logistics
Both of these are "critical points" given its outsized investment in Frito over the past five years, which has generated a "disappointing ROI," according to Lieberman
JPMorgan (neutral), Andrea Teixeira
Expects negative stock reaction to the "sizeable net tariff impact" and macro/consumption volatility
It's the first time PEP misses EPS estimates in "many years"
Core EPS guidance lowered by a "very high magnitude" despite the company's plan to take mitigating actions
North America savory snacks volumes were down 4% in 1Q, worse than Teixeira's -3.5% estimate, and will likely "remain the key concern for investors as far as calling for a potential inflection given the several headwinds (low-income consumer under pressure, GLP-1, etc)"
Bloomberg Intelligence, Kenneth Shea
Higher-than-expected supply-chain costs related to global trade volatility were the "key factor" to 8% drop in 1Q adjusted EPS
Shea blames the "lingering weakness" in the PepsiCo Foods North America segment as the main reason for the EPS guidance cut
Piper Sandler (overweight), Michael Lavery
NA Food segment remains challenged, while organic revenue growth in international business continues to be healthy, growing 5% in the quarter, driven by beverages
Lavery said she expects to hear more about productivity savings progress and promotional outlook for the salty snack category on the company's earnings call
Also hopes to better understand what tariff assumptions are included in PEP's updated guidance
Additional headlines from the Pepsi CEO:
PEPSI CEO: WORKING ON 'RIGHT-SIZING' COST OF FRITO LAY PRODUCTS
PEPSI CEO: CONSUMERS IN CHINA, MEXICO 'HURTING A BIT'
PEPSI CEO ON DYE BANS: SHIFTING ENTIRE PORTFOLIO NATURAL COLORS
PEPSI CEO: TRANSITION TO NATURAL COLORS IN NEXT FEW YEARS
PEPSI CEO: EXPECTING LIMITED IMPACT IN US SNAP PROGRAM CHANGES
PEPSI CEO: DEVELOPING PROTEIN PRODUCTS, KEY FOR GLP-1 USERS
Proteins for GLP-1 users??
